Directors’ loans matter because an overdrawn balance can trigger extra tax and penalties. Small dips in and out of the company bank can build into a large risk. Clear records keep you safe and reduce stress at year’s end. Simple fixes exist if you act early and use the right steps. With the goal set, let’s start with what a director’s loan account actually is.
What is a director’s loan account?
A director’s loan account is the running total of money you take from or put into the company outside of salary and dividends. If you take out more than you put in, the account is overdrawn. If you put in more than you take out, the company owes you. Bookkeeping entries and board minutes should match the movements. Once you know the balance, the next question is the tax risk.
When do I pay Section 455 tax?
You pay Section 455 tax when your director’s loan account is overdrawn at the year-end and still not cleared nine months and one day after. The charge is a temporary Corporation Tax that the company pays on the unpaid loan. The tax can be reclaimed when the loan is repaid, but that refund takes time. Large balances can hurt cash flow while you wait. Because of this delay, many directors plan to clear the loan earlier.
Do I pay benefits in kind on a cheap or interest-free loan?
You pay a benefit in kind if your loan is above the small limit and you pay less than the HMRC official rate of interest. The benefit is reported, and Class 1A NIC is due from the company. You may also face extra personal tax on the benefit through your return. Paying a fair interest rate can reduce or remove the charge. If the loan is small, the benefit rules may not apply.
Can I clear an overdrawn loan with dividends?
You can clear an overdrawn loan with dividends if the company has enough retained profits and the dividend is properly voted. If profits are not there, a dividend can be illegal and make things worse. A bonus through PAYE may be safer than a paper dividend that fails the tests. Some owners use a mix of small dividends and small bonuses to balance taxes. With options on the table, timing becomes critical.
What is the 9 months and 1 day rule?
The 9 months and 1 day rule is the deadline to clear the loan after the year-end to avoid or reduce Section 455 tax. If you repay before this date, the charge does not arise for that part. If you repay later, the company can reclaim the tax, but only after a wait. A simple repayment plan can hit the key date without strain. Good planning here saves both tax and hassle.
What is the 30-day “bed-and-breakfasting” rule?
The 30-day rule stops you from repaying a loan just before the deadline and taking the money out again right after. If you withdraw again within 30 days, the rules can treat it as if no real repayment happened. Larger movements over a set threshold also have anti-avoidance tests. Genuine repayments and real changes in behaviour are the safe route. Knowing this helps you plan clean, lasting fixes.
How should I record and approve movements?
You should record every movement with the date, amount, and reason, and file simple board minutes for key decisions. Keep dividend vouchers, payslips, and interest notes tidy and complete. Reconcile the director’s loan account each month so surprises do not build. Store bank statements and invoices that explain each entry. Clear records make year-end queries fast to answer.
What are safe ways to clear an overdrawn balance?
Safe ways include voting a lawful dividend, paying a bonus through PAYE, repaying cash from personal funds, or recharging genuine expenses. You can also reduce cash drawings and switch to a steady salary level. Small monthly repayments often beat one large scramble. If the company owes you money, set off balances to zero the account. The best choice depends on profits, cash flow, and your tax band.
What mistakes should I avoid right now?
You should avoid taking cash without notes, booking illegal dividends, or ignoring the 9-month deadline. Do not rely on a quick repay-and-reborrow loop that breaks the 30-day rule. Do not leave interest decisions until after the year-end. Avoid missing CT600A disclosures, as omissions slow refunds and raise risk. Small habits today prevent big costs later.
How do I plan cash so this does not happen again?
You plan cash by setting a monthly cap on drawings and matching it to salary and lawful dividends. Review retained profits before each dividend and keep a buffer. Add a simple 13-week cash flow so tax dates and payroll are visible. Reconcile the director’s loan account at the end of the month with your bank. With a steady plan and lessons learned from walking away from a Bounce Back Loan, year-end becomes routine rather than a rush.
What Matters Most: Record, Repay, And Review Monthly
Check your director’s loan account balance, note the year-end date, and map the 9-month deadline. If the account is overdrawn, choose a clean fix such as a lawful dividend, a PAYE bonus, or a real cash repayment. Record the action with board minutes and update the ledger the same day. Set a monthly review so drawings match profits and rules. With clear records, timely steps, and guidance from our business debt specialists, you avoid Section 455 pain and keep your books calm and compliant.